Published in the Wigan Observer:
The recent budget changes to Child benefit come into force in January 2014 and are estimated to affect 1.2m families. Any family where one person earns £60,000 or more will lose all of their entitlement, whereas those earnings £50,000 to £60,000 will lose their benefit by 1% for every £100 of income above £50,000. Child benefit is worth £20.30 for the first child and £13.40 for each subsequent child or £1,752.40 a year for two children, tax free. For someone employed and earning £60,000 they are taxed at 40% on their earnings on that top £10,000 of income and will also pay 2% national insurance, which equates to £4,200 in tax. Combining the tax, national insurance and loss of child benefit resulting from earning the last £10,000 of income that’s a total of £5,952 for a two child family, more if you have more children. That’s the equivalent of a total tax rate of 59.5% – even higher if you have more children! But is there anything you can do about it? Depending upon your disposable income and therefore your ability to reduce your net income, you could increase your pension contributions to lower your taxable income, thus preserving some, if not all, of your child benefit. For someone earning £60,000, pension contributions of £10,000 would preserve of all the child benefit, which effectively costs you £4,048 (i.e. £10,000 less £5,952) if you have two children. You could of course do something in between to partially preserve your child benefit.
There are many different variations of income. For instance a couple where one person earns less than £50,000, but the other earns say £55,000. If both parents contribute to pension schemes you can consider switching contributions from one parent to the other. Or if both parents earns within the £50-60,000 bracket consider switching contributions to produce the same total level of income, but the lowest possible income from the highest earner. These ideas will of course also shift the retirement savings from one earner to another, which may not appeal to the lower earner. And you also have to consider the impact on employer contributions which can be affected by shifting contributions. As always it is necessary to take advice that is specific to your own circumstances.
The changes also bring into play a whole new layer of complexity, as the assessment is based on actual earnings, which of course you can’t be certain of until the end of the tax year. Families where one individual earns between £50,000 to £60,000 will continue to receive the full benefit, but will have this clawed back through their tax bill. This will mean 500,000 additional people having to complete a self assessment tax return.